Inflation remains at 2% target but Bank of England interest rate decision on ‘knife-edge’ | Personal Finance | Finance

The rate of Consumer Prices Index inflation remains at the Government-set target of two percent in June, the Office for National Statistics (ONS) said.

It means that prices are still rising across the country but at a much slower rate than in recent years when households and businesses were being squeezed during the peak of the cost-of-living crisis.

The largest upward trend was driven by restaurants and hotels, where prices increased by 6.3 percent in the year to June. The largest downward contribution came from the prices of clothing and footwear, with items rising in cost by 1.6 percent, compared to three percent in May.

Commenting on today’s inflation figures, ONS Chief Economist Grant Fitzner said: “The inflation rate was unchanged in June. Hotel prices rose strongly while second-hand car costs fell but by less than this time last year. However, these were offset by falling clothing prices, with widespread sales driving down their costs.

“Meanwhile, the cost of both raw materials and goods leaving factories fell on the month, though factory gate prices remain above where they were a year ago.”

Darren Jones, chief secretary to the Treasury, commented: “It is welcome that inflation is at target, but we know that for families across Britain, prices remain high. We face the legacy of 14 years of chaos and economic irresponsibility. That is why this Government is taking the tough decisions now to fix the foundations so we can rebuild Britain and make every part of Britain better off.”

While the CPI data is somewhat positive news for consumers, economists are more focused on core and service inflation.

These indicators provide a clearer picture of underlying price trends and potential future inflationary pressures in the economy, which in turn influence decisions on Bank of England interest rates.

Core inflation, which monitors the change in prices of goods and services – excluding those from the food and energy sectors – has remained steady.

According to the data published today, core inflation rose by 3.5 percent in the 12 months to June 2024, unchanged from May.

Meanwhile, the CPI services annual rate remained unchanged at 5.7 percent.

The core inflation rate is the metric used to determine the impact of rising prices on consumer income. The Bank of England also takes this number – along with the CPI – into consideration when deciding whether to adjust interest rates.

Bank of England interest rates

Tom Stevenson, investment director at Fidelity International, said: “A second consecutive month of headline inflation at target makes a cut in interest rates on August 1 more likely but not yet a shoo-in. The key questions for the Bank of England rate-setters remain persistently high service sector inflation and wage growth.

“It is a sign of how far we have come in the fight with inflation that today’s repeat two percent reading elicited a shrug. It was only 20 months ago the UK was an inflation outlier with prices rising at 11.1 percent. But policymakers are more concerned with the pace of price rises in the service sector, which accounts for 80 percent of the UK economy, and which remained unchanged at 5.7 percent. Core inflation, excluding energy and food, was also flat at 3.5 percent.

“Tomorrow the focus will be on the employment data, which is forecast to show only a modest decline in basic wage growth from six percent to 5.7 percent. Wages are a key component of service sector inflation.

“The decision on whether to cut interest rates from a 16-year high of 5.25 percent next month remains on a knife edge.”

Suren Thiru, economics director at Institute of Chartered Accountants in England and Wales (ICAEW), added that, while these figures provide “further reassurance that the UK’s inflation crisis is in the rear-view mirror”, uncomfortably high services inflation suggests that its damaging after-effects are still being felt.

Mr Thiru continued: “Though it may slow in July, following the fall in Ofgem’s energy price cap, inflation is likely to drift moderately higher, thereafter, fuelled by stronger demand from a faster-growing economy and low labour supply.

“Sticky services inflation will cause considerable unease at the Bank of England because it suggests that underlying price pressures are frustratingly persistent and leaves the UK more vulnerable to the impact of future price shocks.

“While anxiety over underlying price pressures keeps the prospect of an August interest rate cut on a knife edge, these figures should at the very least drive a more dovish vote split to signal that rate cuts are imminent.”

Savings account interest rates

For many, it is good news that inflation is holding steady at the Bank of England’s target of two percent. But for savers, it means action might be needed to lock in higher rates while they are still available, an expert has said.

Adam Thrower, head of savings at Shawbrook said: “Inflation has remained steady at below the Bank of England’s two percent target. This situation, if it continues, could lead to interest rate cuts in the future, potentially impacting returns on savings accounts.

“With discussions of rate cuts in August, some savers might find fixed-rate accounts with longer terms more attractive now than they might be later.”

For the top-rate interest savings accounts and ISAs of the week, click here.

Pensions 

Pensions experts have described the first inflation rate reading since the election as a “promising sign”, although have urged savers to be cautious.

Lily Megson, Policy Director at My Pension Expert, explained: “For retirees and those planning their retirement, stable or target levels of inflation are crucial. But we mustn’t fool ourselves. Target inflation isn’t an immediate fix for years of savings-bashing price hikes.

“It’s therefore vital people are provided with the help and support they need to get fully back on track with their finances.

“Our new Government should use this period of stability to move Britain out of ‘defence mode’ and reinforce financial education and guidance on savings and investments. With inflation under control, people can start to feel more secure about their future, but ongoing support and practical advice will be key in helping them regain their financial footing.”